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Real estate site targets underserved commercial sweet spot

They are the vast majority of the office market, and yet they are sorely underserved: small-business tenants who need smaller office spaces. They make up 80 percent of the nation's office market, but commercial real estate brokers steer clear of dealing with them because the process is too labor intensive, and the payoff is too small.

"It takes the same amount of time and resources to deal with a 4,000-square-foot tenant as it does with a 40,000-square-foot tenant," said Andy O'Brien co-founder of HiRise, the first online marketplace for commercial real estate. "The market is broken for smaller tenants because the big brokerages are not focused on tenants that size."

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HiRise intends to fix that with an online rental site targeting that underserved market of small businesses, government contractors, start-ups and anyone who needs a smaller office space for a shorter lease period. In the United States alone, more than half a million tenants occupy office spaces that are less than 5,000 square feet.

O'Brien created the platform with colleagues at Jones Lang LaSalle (which now goes by JLL), a global real estate services and brokerage firm. The HiRise website will launch next month in the Washington, D.C., market, offering a model much like vacation rental sites such as VRBO or Airbnb.

In the Washington, D.C. metro area, small tenants outnumber large tenants 3 to 1, and yet more than 46 million square feet of small space remains vacant because the traditional leasing policies cater to large tenants, according to HiRise.

"Our model is directly from the building owner, so you're taking out that layer of approvals needed for a sublease and tapping into 80 percent of the market by simplifying the process. There is an interactive floor plan, a short form, all online," O'Brien said of the website.

Offices can be rented furnished or unfurnished, generally for far less than the usual 10- to 15-year leases signed by larger companies. The offering is a reaction to two new realities in the commercial office space: Lease terms are shortening due to uncertainty in the economy and the market, and younger millennials, used to doing everything online, are demanding an easier method of finding flexible workspaces for new companies.

Landlords are also looking for new ways to fill space.

"Part of it is the slow market for regular leases," said Sam Chandan of Chandan Economics, an expert in commercial real estate. "It is a low-cost way of making that space work."

The U.S. office market has been recovering very slowly, due to still tepid job growth. The national office vacancy rate in the first quarter of this year declined only slightly and is still 430 basis points below the sector's cyclical low of 12.5 percent before the recession, according to Reis. Rents aren't growing much either.

"The national vacancy rate will need to fall by hundreds of basis points before we observe any meaningful acceleration in rent growth," noted Ryan Severino, senior economist at Reis.

"Additionally, because landlords have such little leverage over tenants, concessions are pulling back rather slowly, as evidenced by the fact that effective rent growth remains more or less on par with asking rent growth."

The founders of HiRise are hoping that by creating a direct line between landlords and tenants, they will be able to get more office space filled faster and evolve the overall market. They will start in D.C. but expect to offer services in other U.S. markets as well.

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  • Diana Olick serves as CNBC's real estate correspondent as well as the editor of the Realty Check section on CNBC.com.

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